When shopping for a mortgage, finding the best interest rate is likely your main concern. However, you should also be concerned with the mortgage agreement the lender will ask you to sign.
These days, traditional mortgage agreements are increasingly rare. Financial institutions will generally ask you to sign a “mortgage security” agreement instead.
What is the difference?
In a “mortgage loan” agreement, the debt covered is clearly indicated. The mortgage amount is equal to the loan amount, the interest rate mentioned applies to the loan within the agreement and all repayment terms are precisely outlined. When the loan is fully repaid, the mortgage payment agreement is then fulfilled and terminated.
In a “mortgage security” agreement, the extent of the debts that the mortgage covers can vary greatly from one financial institution to another. For example, the agreement may cover the repayment of all current and future debts owed to the lender. The total amount of the mortgage loan is usually higher than the actual home loan amount upon signing, the interest rate in the agreement is higher than the one negotiated for the loan, and the repayment terms include additional clauses. The mortgage agreement is not terminated after the repayment of particular debts, and even after repayment of all of your debts.
A Credit Tool
Mortgage security agreements can however be useful credit tools, but one should fully understand the agreement and still proceed carefully. The agreement allows borrowers to obtain additional cash advances without having to sign another mortgage agreement. However, the agreement is drafted with the mortgage covering all of these potential advances, and this is where one must review these aspects carefully.
Obligations covered by the mortgage
For example, a clause may indicate that the mortgage covers all current borrower debts as part of the mortgage security for the financial institution as well as future debt if the borrower agrees in writing.
In other such agreements, the mortgage would potentially cover all current and future debts of the borrower as well as those of his/her spouse, future spouse, etc., as part of the mortgage security for the financial institution. The borrower consequently agrees in advance that borrower future debts be covered against the mortgage, where such debts would include line of credit balances, personal loans, as well as any other amount due as security.
How do you choose?
There are many types of agreements. So one must make an informed choice, and then ask, when obtaining a loan or signing a security agreement: Are the particular amounts that I owe or may owe included as security within my home mortgage agreement?
It should also be noted that it may be very difficult, considering the security agreement signed, to grant a second mortgage to another lender or transfer the mortgage to another financial institution.
Before shopping for a loan or before signing a financing or refinancing agreement with a financial institution, consult your notary, a real estate law specialist. Your notary will provide all useful information to help you select the mortgage product that best suits your projects and meets your needs, will go over the key points of security agreements provided by various financial institutions and the extent of the obligations covered by the mortgage.
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